The National Grid (LSE: NG) share price has rallied strongly and is up by about 15% so far in 2019. Is it too late to buy into this income stalwart?
In this article, I’ll give my verdict on National Grid. I’ll also reveal another income stock I like, which currently yields 7%.
The ultimate buy-and-hold?
The future is always uncertain. And it’s all too easy to construct worrisome stories that discourage you from making long-term investments.
After all, National Grid’s current UK business basically consists of operating electricity networks that are connected to a handful of big power stations and wind farms. Its gas network is similar.
What will happen if we all shift to microgeneration, with solar panels, fuel cells and battery packs in our garages? This kind of technology is becoming a reality and environmental concerns suggest it’s likely to happen. Will it make the grid redundant?
I think not. National Grid will need to change and invest in its network. But the idea that homes and businesses will go off-grid seems unlikely to me. To balance supply and demand and minimise pollution, I think it will be essential to be able to distribute energy efficiently across the UK.
Indeed, I think international energy trading is likely to expand, through greater use of undersea interconnectors. This is an area where National Grid has already been investing heavily.
Don’t forget the US
The other attraction that makes this firm stand out from UK utility rivals is that roughly half the group’s profits are now made in the USA. This adds a nice level of diversity to the business, in my opinion.
Regulatory risks will always be a concern, here and in the USA. The group’s profitability is restricted by what it’s allowed to charge. But National Grid’s long-term focus gives very predictable revenue and profits over multi-year periods. For income investors, I think this is a valuable asset.
As I write, the stock offers a 2019 forecast dividend yield of about 5.4%. In my view that’s a good starting point. I still see this as a great buy-and-hold choice for dividend investors.
I’m tempted by this newcomer
UK insurers are out of favour with investors at the moment. Many companies are struggling to deliver growth in a mature and competitive market.
FTSE 250 newcomer Sabre Insurance Group (LSE: SBRE) is no exception. But I don’t see this as a reason to avoid this motor insurer. Figures published today show that despite a rise in claims costs last year, the business remains very profitable.
Sabre’s focus on drivers who attract above-average premiums seems to support high profit margins. Today’s figures show that the business generated a return on tangible equity of 54.4% last year. This ratio is commonly used to measure the profitability of financial businesses, most of which produce much lower returns than this.
High returns on equity often go hand-in-hand with strong cash generation. That seems to be true here. Despite a 6% fall in adjusted pre-tax profit last year, Sabre generated enough surplus cash to support a 20p per share dividend.
At the last-seen share price of 286p, that gives the stock a 7% dividend yield. Analysts expect this figure to drop to 18.9p per share next year, giving a 6.4% yield. But I feel that Sabre’s profitability suggests it could be a good long-term income buy.